The most preferred mode of settlement of commodity derivatives should be physical rather than cash settled, unless the commodity is intangible, difficult to store and transport or has a low shelf life, SEBI has said in a circular on Monday.

The circular, effective from October 16, paves the way for launch of new contracts by exchanges which would be physically deliverable rather than cash settled and of use to hedgers, market experts told ET.

To effectively discharge their hedging function, commodity derivative contracts must be anchored to their respective underlying physical markets.

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